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401(k)s

Brexit shows the importance of account consolidation

J. Spencer Williams is president and CEO of
Retirement Clearinghouse where he applies more than 25 years of experience
in starting, building and leading businesses in the financial services industry.
Under his leadership, Retirement Clearinghouse introduced new industry best
practices, been recognized for innovation and improved the operations of
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When British voters chose to leave the European Union, the result sent shockwaves across the world and had a significant impact on global markets. For those on this side of the Atlantic who are saving for retirement, the Brexit-related market volatility demonstrated yet another reason why, throughout their working lives, retirement savers should consolidate their retirement savings accounts at the time that they change jobs.

Global equity markets suffered over $3 trillion in losses in the first two trading days following the Brexit decision. But investors whose retirement accounts are already consolidated into their current-employer plans are best-positioned to withstand the cross-currents that a Brexit-like event precipitates. How, you might ask?

Most defined-contribution plans offer participants an array of tools to help them avoid spontaneous or emotional decisions, such as investment advice, guidance and commentary from financial advisors, "set it and forget it" investment products such as target-date funds, and managed accounts that include professional investment management.

One example is Russell Investments' adaptive retirement accounts, which offer a new type of target-date fund allowing participants to customize their asset allocations so they align with their retirement-income goals. These and other "guardrails" built into employer-sponsored plans help investors "stay the course" whenever the financial markets experience a shock from an unanticipated event like Brexit, and avoid the initial sell impulse that many people experience during rocky times.

Ongoing account consolidation at the point of job-change is certainly helpful for navigating challenging markets, but merely being a participant in a defined contribution plan gives you access to investment guidance, products and services that help you weather market volatility. One such service is the facilitation of asset portability, and its value extends far beyond the help you'll receive when it comes time to fill out the paperwork needed to transfer your account to your new-employer plan.

Consider the following examples: If you leave behind a 401(k) account with a balance of less than $5,000 in your former employer's plan, then the employer has the right to automatically roll your balance into a safe-harbor IRA. But if you move and don't provide a new mailing or e-mail address for the plan record keeper, then you won't receive the notification about the rollover, and you'll have to painstakingly track down your savings when you want to access them. By using portability services at the time of a job change, you'll avoid these circumstances — and you'll also avoid the extra fees that investors have to pay for multiple retirement savings accounts.

Furthermore, if you forget about a stranded account, then you forfeit the opportunity to make investment decisions that could prevent significant losses in that account during events like Brexit. You may even forfeit the entire account — if your account is considered abandoned because you can't be located, it could be escheated (claimed by your state).

The same goes for a stranded account with less than $1,000 — but in that case, the employer has the right to automatically cash out the balance, and if your contact details in the plan record keeper's files are out-of-date, then you're out of luck.

These are examples of bad things that can happen if you don't consolidate your accounts at the time of your job change. Let's also consider some good things that can happen, such as avoiding the temptation to cash out your savings.

Indeed, the Auto Portability Simulation that we developed in cooperation with Dr. Ricki Ingalls of Texas State University found that a great deal more retirement savings would be generated if fewer Americans cashed out their less-than-$5,000 401(k) accounts at the point of job change. The simulation found that, in a scenario where auto portability (the seamless, automatic movement of under-$5,000 accounts between plans at the point of job-change) is widely implemented over 10 years and remains in effect for a generation, more than $100 billion in new savings would be added to the retirement system, due to a nearly two-thirds reduction in annual cash-outs of under-$5,000 401(k) accounts.

The market volatility attributed to Brexit brought home to Americans that consolidating retirement-savings accounts whenever they switch jobs, and keeping them in the retirement-plan system, can pay off during extreme market conditions. This is yet another benefit of roll-ins, on top of helping participants avoid the temptation to cash out or leave accounts behind at the point of job-change.

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